Hi I'm a novice real estate investor and wanted to pose a question to the RE veterans here on the strategy I should take regarding my situation. I'm in a LLC with 3 of my siblings and we are looking at closing the LLC to go our separate ways sometime this year. Right now we have 2 properties that we own on the LLC. A house in Texas that currently has a mortgage and is being rented out. We also have a house in Las Vegas that is paid off and being rented. My brother is proposing to buy the Las Vegas house from the LLC and I'm looking to do the same with the Texas house. Both houses are titled under our LLC.
My question is can we retitle the house in Las Vegas from LLC to me and my 3 siblings so that I can use the proceeds of the sale to do a 1031 exchange to buy the house in Texas? Is there a tax implication from retitling from LLC to siblings? Finally, is their a wait time for my brother to buy the Las Vegas house from us for me to do the 1031 exchange on the Texas house.
I apologize if this post is confusing. Thanks in advance for your input.
@Allen Magtibay , In general contributions into and distributions out of an LLC are not taxable events. So dissolving the LLC and putting the property into each of your names as tenants in common would not be too much of an issue for your accountant.
But once that happens you now have related parties in ownership of properties wanting to sell and buy from each other. Related party transactions, while no expressively prohibited, do come with their share of risk of scrutiny. But that might be your only solution if you're wanting to avoid and attempt to 1031. If you weren't related parties it would be a simple matter.
@Dave Foster Thanks for your input. I was wondering if the fact that we are siblings and buying an existing property from our own LLC raise a flag. Would it be smarter and easier for me to just take the money I make in the Las Vegas sale and buy a different property? Still planning to buy the Texas house from the LLC but would just do the normal financing on that.
I'm a touch confused...
In my layman's opinion, I think it will be messy to have four of you on the Title... Just for the sake of more tax filing paperwork..
Non-arms length transactions are NOT prohibited from my understanding. From an audit perspective, I vaguely recall you just need to have justification for sales price and stuff. Otherwise, people quit claim deed properties within families for a $1 all the time. But, if you want to claim deductions and have a basis you can stand on...
@Dave Foster would have to chime in about hte 1031 timing. I thought for the 1031 the tax id has to be the same. Or, is that what Foster is saying that since distributions from a LLC are NOT taxable events you don't really need to do a 1031.
So, here is the thing: What are your expectations, as a group, for having proceeds from the transfer of these properties? What does your operating agreement say for dissolving the LLC? Since the distributions from the the LLC are not taxable events, you 4 could just transfer Title from the LLC to yourself and your brother. At the same time, the two of yous would probably need to bring cash to the table to buy out your other siblings. As I understand it as a layman, that's just a business buyout, not entirely a real estate transaction.
Make any sense?
I found this one an interesting scenario and would love to know what you learned or decided to do after your research is completed.
I wish I has the wisdom to share . . .
I assume (and hope) you have conducted w/ an att. and who knows entities and taxation as this is a classical case for it.
BTW, ta good title co. would be about to assist as well
Changing title from an LLC to a personal name (or any for that matter) will trigger a reassessment of property value by the county in California. You may want to check with you local property accessor to confirm and understand property tax implications for that transfer.
Thats a good point. I don't know if Nevada works like CA. You West Coast rules with setting the assessment to the last sales price is a annoying... At least I don't think Texas works that way... Anyway, something to look into...
Easy way to fill the coffers, they just need to start plugging the holes.
I know some investors who pays 1/2 of their annual rental income to property tax alone (mine are about 1/3).
I've heard in Washoe county NV they assess your taxes based on 1/3 of the property value, not sure if that's true in other counties but a big reason why the homes on the Nevada side of Lake Tahoe are significantly more expensive than just across the dividing line.
it might be. Every State is different. I think it was Ohio or TN... they have a staturtory percentage built in. So, for residential the assessed value is 30% of the assessed market value, and commercial its a different percentage. But, they still do an ad valorem tax similar to most States on the East Coast where the assessments are summed up to form the ratables, and the property tax floats against that value to provide hte necessary funds for the municipality to operate.
As I understand it in California, you have a fixed property tax rate. So, as the assessed values go up and down with the sales, the municipality may or may not take in enough funds.
Let your brother buy the vegas house. He'll owe 3/4ths of the value, 1/4th to you and each of your 2 other siblings. You on the other hand are only buying the equity on the Texas home assuming you can keep the financing. (Either as eventual sole owner of the LLC, if it borrowed money, or as a subject to if one of your siblings or all of you did. ) in other words, IMHO, you'd only need to pay each of your siblings 1/4th of the equity in the Texas property each. Hopefully something you can easily do with your 1/4th of the value of the vegas property you receive from your brother.
Why not retitle one house into its own LLC then you all work out payment between the 2 LLCs? Seems like there would be less tax that way?
@David M. , You're absolutely right - the tax payer has to stay the same. That would be the motivation for dissolving the LLC and placing the properties into each brother's names as tenants in common. You could even decide to adjust the %s owned of each brother in each property. So upon the dissolution, Brother 1 gets all of the Vegas house, @Allen Magtibay gets all of the texas house. And brother 3 gets screwed :) (or maybe a small interest in each of the houses that brothers 1 and 2 can pay him for. The dissolution of an LLC is not a taxable event by itself. So once the brothers have the properties in their names then they can each go their separate ways with or without a 1031.
Dave, I think the issue with your plan is the apportionment --- I need professional to double check. If you hold Title TIC, or anything similar, the interest in the property is always equally split. That's why you need a legal entity when investing with a non-spousal partner to be able to make your own splits, equity or profit/loss.
This is why I am thinking just dissolve the LLC with putting the respective properties into the respective siblings name, but then cash has to be brought to the table to buy out the other siblings. There are a bunch of assumptions here including that there is equity to buy out and the Partnership Agreement allows this.
I just don't see a real "purchase" going on here. While I haven't done it, I thought the dissolution of a LLC really was the reverse of forming one. You contribute capital, in whatever form, to the LLC on its formation. So, on its dissolution the capital is distributed.
@Allen Magtibay Why not buyout their LLC membership interest? If you plan to sell the house give them an IOU or second mortgage to pay when you sell. Or refinance after you buyout their membership interest and pay them off out of the proceeds. This way should be much easier and no fees or taxes with changing title.
Hi @Allen Magtibay ,
There are a lot of issues involved here. How to hold title? How to deal with the LLC? How to structure a 1031 Exchange? Can the related party issues be overcome? Tax issues. Reassessment issues. Individual sibling tax issues that might affect the overall decision or the way the transaction is handled. You need to consult with a tax advisor well versed in real estate and then also consult with an attorney to be safe.
I wanted to expand on the related party issues from the perspective of the taxpayer/investor doing a 1031 Exchange. You can sell to a related party without much of a problem. The only issue to worry about here is a 2 year holding period. Buying from a related party is more problematic and in most cases will not work. There is the same 2 year holding period, but then we have to address "basis swapping" issues under IRS Revenue Ruling 2002-83. There is a specific ruling that allows family members to exchange between themselves when the goal is for each of them to end up with 100% of one of the properties. These issues are complex and should only be done with advice from tax and legal counsel.